On a fateful day, I received a message from Tayo, a Retiree who is utterly confused as to whether to choose an Annuity or Programmed Withdrawal (PW). “I was told PW can only pay me a pension for 10 years” he quipped.
As with our professional values at PensionTalk, we do not tell retirees whether to choose an Annuity or PW because that decision is entirely theirs and theirs alone. What we do, if asked, is to inform them based on the features of the two products by laying before them each product’s unique characteristics and how they differ from one another where applicable.
Tayo’s submission stems from the fact that it is generally believed that PW only offers or pays pensioners under the CPS for a maximum of 10 years.
Is this really the case?
Under the PRA 2014, an RSA holder at retirement can choose An Annuity plan with a life insurance company or Programmed Withdrawal (PW) with a PFA of choice.
An annuity plan pays periodic pensions to retirees for life. It can be bought from any life insurance company that offers the plan. Any Retiree interested in going for an Annuity will inform his PFA of his choice of choosing an Annuity other than PW and every necessary process that needs to be carried out will be done.
A Programmed Withdrawal is a product of the PFA for the RSA holders at retirement. Just like an Annuity plan, PW also pays periodic pensions to Retirees.
The 10-year Myth?
There’s a general belief that PW will only pay retirees for a maximum of 10 years.
The truth is that this is not the case. There is no such rule.
Under the PW arrangement, a Retiree’s pension is determined by a number of factors one of which is life expectancy. Other factors include age at retirement, sex, last salary received, etc.
For instance, according to available statistics, life expectancy for men in Nigeria is approximately 60 years while that of women is 63 years in 2021.
Debunking the 10-year Myth
In context, If a man retired at 50, in calculating his periodic pension under the PW, his life expectancy calculation will be based on the 60 years life expectancy (assuming the life expectancy used in the PW calculation template is 60).
Therefore, some confuse this to mean that the PW pension will only last for 10 years (i.e. 60 years minus 50 years) because the life expectancy of the man is set at 60 years!
While this is not the case, it is important to note that life expectancy is just an estimate and it remains so. It is only a factor used in the calculation of pension and does not equate to the maximum number of years pension under the PW will be paid to Retirees.
Most retirees get confused here and are made to believe that PW last for roughly about 10 years. It is therefore important to set the record straight so that Retirees can take decisions based on true facts relating to the options they are presented with when they retire.
A special arrangement under the PW option
With the PW, a retiree also has the advantage of enjoying the following:
1. Periodic upward Pension review
2. Receipt of Minimum Pension, where the RSA balance of the retiree got exhausted while he is still alive.